Thom Hartmann: Welcome back, Thom Hartmann here with you. And a special treat today. We're going to have, Louise, thank you. We're going to have, actually we have with us, Professor Steve Keen. He's the associate professor of economics and finance at the University of Western Sydney, the author of "Debunking Economics". And his website, which is a must-read, DebtDeflation.com, check that out. Professor Keen, from Australia, thank you for joining us. Welcome.

Steve Keen: You're welcome Thom.

Thom Hartmann: We had an interesting conversation a couple of days ago on television and I want to revisit some of those topics here in a little longer form. We're going to take this entire hour. There will be, you know, periodic commercial breaks and things, but or breaks isn't the word, but let's just start at, actually, let's start at where we are right now. Are we in a depression?

Steve Keen: Yes. It's amazing how long people will spend in denial about, virtually any problem, from personal health through to economic crises, but this one is a depression, it is not a recession, and the sooner we make that categorization of the situation we're in, the sooner we'll start getting potentially sensible policies rather than the insane ones that are being debated right now.

Thom Hartmann: Now, the last great depression, the one in the 1930s, was not identified as a depression for some time. About what time, about what point in time did people start referring to it as a depression, and realizing the level of reaction that was necessary to it?

Steve Keen: Yeah. It was in fact called a depression because all downturns were called depressions back then. It's interesting how one of the major things humans do is come up with, you know, softer sounding alternatives to harsh words we use initially. So a boom is called a boom and a recession was called the depression back then. It became called the Great Depression in it was the '35, '36 period. And certainly if you look through Keynes' "General Theory" for example, there's no reference to a great depression. So only once the Second World War had started that the word started coming into, the term great depression, common usage, to distinguish from all previous depressions which were nowhere near as severe as that one.

Thom Hartmann: Right. So realizing that this was a unique event, or at least a unique event in the lifetime of the people who were alive at that time…

Steve Keen: That took time, yeah.

Thom Hartmann: Yeah. That was only in retrospect. Do you think that this great depression that we're in right now, and would you call this a great depression? Will be recognized in retrospect or do we have the ability to recognize it for what it is right now? And what's the criteria that you would use to say yes this is a depression.

Steve Keen: Well, firstly we do have the capacity to classify it properly but that's a capacity which only a handful of people actually have any understanding of what caused the crisis actually have. I'm one of them, but I'm not the only one. People like Michael Hudson, for example, Ann Pettifor, and so on are others who have identified this as not your ordinary recession, something therefore has to be classified differently. Closest thing to it is the great depression though. Just recently Ken Rogoff, who is one of the empirically-oriented neoclassically-originated economist I have some time and respect for, he's come out and say we stop calling it the great recession and call it the great contraction. And that in that sense, gives you, we've called both the great depression and this experience a great contraction. And what helps you identify it in a causal sense, is that what causes a crisis like this is the sustained reduction in the level of private debt after that private debt has reached unsustainable levels previously.

So the great depression, just to give you an idea of that, had a level of private debt that pegged to 235% of GDP, but that was after two years of deflation after the start of the crisis. It began at a level 175% of GDP. Once the whole thing was over, and by over I mean the end of the Second World War because the great depression led to the Second World War, the debt level went back to 45%. So you've gone from 175% of GDP to 45% of GDP and then the whole thing started all over again. We have gone from 45% of GDP to 300%.

Thom Hartmann: If I may interrupt you…

Steve Keen: Yeah.

Thom Hartmann: Before you continue with the story. You said, and then the whole thing started all over again. Did it start all over again in the 1940s or you mean it started all over again in the 1980s or '90s or the 2000s?

Steve Keen: In one sense, if I wanted to say when we actually got into the speculative bubble stage that led to the crisis we're in now, I'd date that from the '60s, you're quite right.

Thom Hartmann: OK.

Steve Keen: But after the 1930s experience, the debt level was paid down so far, that we probably got below what you might regard as a sustainable and sensible level of debt for the American economy, when you hit 45% of GDP.

Thom Hartmann: Right. So we hit 45%. So then to current day, you were, this is where you were going when I interrupted you. My apologies.

Steve Keen: Yeah, no worries. You got to 300%. It has now fallen to about 250%. Now we've had other instances in the past where the debt level's reached a peak and fallen back a bit, so the 1970s for example, you had a 1 or 2 percent fall in the level of debt compared to GDP, private debt. Then the 1990s you had a more substantial fall. I've forgotten the exact numbers, I'll bring them up while we talk. But you had a fall from say something of the order of 170% down to about 165%. But this time we've gone from 300% to 250 and it's…

Thom Hartmann: In what period of time?

Steve Keen: Pardon?

Thom Hartmann: In what period of time?

Steve Keen: Over a two year time period.

Thom Hartmann: Over a two year time period we've dropped about 50% of GDP in terms of private debt.

Steve Keen: Yeah, yeah. Very fast.

Thom Hartmann: That's, yeah, that's pretty radical, that's pretty dramatic. So are you suggesting that we need to, that we've gone from 300% more or less of debt, three times GDP in terms of private debt, to two and a half times GDP of private debt, and we won't be out of this depression until we get down to what?

Steve Keen: About 1 times, GDP.

Thom Hartmann: About 15 trillion dollars, 100% of GDP.

Steve Keen: Yeah, yeah. No, no. Sorry, 20 trillion. Because the private debt level in America peaked at 42, 43 trillion dollars. It hasn't, it has been paid down a small amount, but what you've got are a combination of two factors at once. Even though GDP is not growing, it's growing a bit. So you have that slight increase in the denominator of the ratio of debt to GDP. But at the top level you have the debt also being reduced in actual terms. So that combination together means your ratio has fallen from about 300% to 250%. I'll give you the exact number…

Thom Hartmann: Right but it's got to get down to 100% before we're not in a depression anymore. And at the current rate of deleveraging, I mean if we re dropping 25% a year, and we've got another 150% to go, is that another five years?

Steve Keen: Something like that. Five to ten years. I am just looking at the exact figures now. It peaked at 301% in February or March of 2009, and fast forward to 2011 and it's down to 260%. So you've fallen 40% over two years. Now by, I think when you get a debt level of around about the 100% level of GDP you're out of the woods in terms of not having a massive amount of speculative debt still on the books and the effect of people reducing their debt by reducing their consumption and investment will be over. But that could take up to ten years.

Thom Hartmann: So we could be in this depression, now is it going to get, we have just a few seconds here before the break is going to hit but then we'll continue our conversation. Is this going to get worse before it gets better? Or is this just going to be awful for a while?

Steve Keen: I think it's going to stay at this awful level and get slightly worse because remember you need a growing economy to absorb a growing population. And if you have a population when you're growing at 1 or 2% per annum and you have technological improvements occurring at a rate of about 1% increase in productive per annum, you need to grow at 3% simply to keep your unemployment level steady. If you instead have the impetus that investment gives you taken out of the economy, then you're going to look at being about best 2% rate of growth so that unemployment will slowly creep up. And that's not pleasant for anybody.

Thom Hartmann: So that's actually slowly sliding backwards, actually.

Steve Keen: Yes.

Thom Hartmann: We're talking with Professor Steve Keen. He's the professor of economics and finance at the University of Western Sydney, the author of “Debunking Economics." His website, DebtDeflation.com, check it out. We'll be right back with professor Keen. Stick around.

DebtDeflation.com is Professor Keen's website. It's brilliant, check it out. We'll be right back.

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Thom Hartmann: Defending America from the weapons of mass deception, welcome back. Thom Hartmann here with you. We're talking with Professor Steve Keen, associate professor of economics and finance at the University of Western Sydney, talking with us live from Australia, where it's probably the middle of the night. And he's the author of “Debunking Economics." His website, DebtDeflation.com. And professor Keen, just to quickly recap, you're suggesting that the seeds of this second great depression were sown in Breton Woods in 1945 with the US dollar becoming the reserve currency of the world and that this depression is different from that of the 1930s because this level of private debt you identified as being 300%, three times GDP, and it's now dropped down to two and a half percent over the last couple of years, thus producing the depression, that that is fundamentally different in character than the level of private debt at the time of the last great depression. How is that? And have I characterized accurately the summary here?

Steve Keen: Yes you have. When back in the 1930s, the, with the level of debt taking in, before deflation began, peaking at 175% of GDP, from that point on the level of debt reduced. Nominal debt actually fell. But the ratio to GDP rose because of deflation. The reason that happened…

Thom Hartmann: Because GDP was collapsing.

Steve Keen: GDP collapsed and so did prices. Prices were falling, by up to and over 10% per annum as well as real output falling by much the same level. So you had this, if you look at the ratio of debt to GDP the denominator just collapsed.

Thom Hartmann: Sure.

Steve Keen: And that drove up the ratio even though the numerator was also falling. Now that debt was, had been being 175% in total, about 125% was private sector, non-financial businesses. You know the shops, manufacturers, and so on. So when they found themselves, the crisis beginning, they had to service their own debt, not the, it was their debt level that was constraining their capacity to spend. Well they had to pay their debt down and the first response was to try to improve their market share by cutting their prices. But of course they all cut their prices. Therefore you've got, prices fell faster than businesses repaid their debt. Another thing, Fisher expressed this in what I call “Fisher's Paradox." He said the more debt is paid, the more they owe. Now that's what gave us the really, really sharp downtown.

This time round, even though we've got roughly 1.7 times as much debt at the peak of the crisis, 301% of GDP versus 175, that debt is only, only 75% of it as it's peak was owed by non-financial businesses. The rest was owed by the household sector and by the finance sector. And the households, rather than having, I think debt levels something to the order of 25 or 30% of GDP back in the great depression, have almost 100% now. So it's not the producers and the retailers who are debt constrained this time around, it's the customers.

Thom Hartmann: And without customers you have no economy. Is this why you're suggesting that we should consider Leviticus 25:10, “Consecrate the 50th year and proclaim liberty throughout the land onto all inhabitants thereof, it shall be a jubilee unto you, you shall return every man unto his own clan, every man to his family, the land," you know it goes on, basically forgive all debt. Free the slaves, equalize everything.

Steve Keen: Yep. That's something, we have to do a modern jubilee. We can't do an old fashioned one unfortunately, because back then of course the advantage was you had a very obvious class of people who were debt slaves and a very obvious class of people who were money lenders and land lords, and you could easily, you would reduce the power of the money lenders and the land lords by doing this but that was politically viable because otherwise you weren't going to have an army. And you were certainly going to have a slave revolt. So it was easy to identify who should suffer and quite often the money lenders suffered by having a rather severe haircut, starting roughly around the shoulder level. That doesn't happen anymore, nor can we do it in the 1930s version and I would, I don't know enough about the bank holiday period under Roosevelt, but I would expect to find this happened during the bank holiday. A lot of debts were reduced at the bank level in that period.

Thom Hartmann: Yes.

Steve Keen: So you know you have mortgages that were reduced and so on, making it easier...

Thom Hartmann: Well plus Roosevelt created a federal agency to take on household debt, you know, to buy household debts out of the banks and give people federally guaranteed loans. Excuse me, pardon me for interrupting.

Steve Keen: Yeah. Back then all it did was affect the incomes of the banks. Now of course if you do it now the trouble is not only do the banks and the non bank financial sector, whose debt level by the way peaked at 120% of GDP, this was a trivial level back in the great depression, rather than the shadow banking sector being the only ones who suffer. They've sold those products to middle America as, you know, assets to have in one's pension scheme and so on. So if we actually abolished the debt, we wouldn't just be affecting the banks now, we'd be affecting people who bought products off the banks.

Thom Hartmann: Right. And not just middle America, it's all over the world.

Steve Keen: All over the world. I mean one of the very first places to suffer of all things was a council in Norway when this whole damn thing began because they had been persuaded to buy some AAA rated bonds by American banks.

Thom Hartmann: Right, and this little town in Norway went bankrupt because they had bought this stuff from Goldman Sachs or whoever it was.

Steve Keen: In good faith.

Thom Hartmann: Yeah.

Steve Keen: I mean that's the thing, we actually trust these people. It's an essential thing about money, is trust. Of course it's been massively abused by the financial sector. But they've scrambled the eggs so completely that unscrambling it is really what we're attempting to do here.

Thom Hartmann: So one minute until the break. In that one minute, quickly, and we'll continue the conversation after the break, but one minute until the break. How do we do that?

Steve Keen: Hm. We have to find a way of rebalancing the system from being fundamentally credit based money to, in this transition at least, fundamentally fiat based without, well while still providing cash for those who have been savers rather than being debtors.

Thom Hartmann: Would that be a variation on the Muslim notion that, and what used to be the biblical notion, that you shall not charge interest, you may only charge fees for banking?

Steve Keen: No, no I don't think so. I'm not particularly, I don't see the problem with charging interest. What I see is a level of principal that's been extended which, the whole word principal implies what's gone wrong because principal, principled, it means done in responsible behavior, with an irresponsible increase of the level of debt outstanding, and we have to find a responsible way of reducing it.

Thom Hartmann: Okay. And we'll talk about how that can be done after the break. We're talking with Professor Steve Keen. He's the professor of economics and finance at the University of Western Sydney, the author of “Debunking Economics." His website, DebtDeflation.com, I encourage you to check it out. And we will continue in about five minutes here, with our conversation with Professor Keen. Stick around.

Are we in a depression? How do we get out of it? What are realistic ways to do it? What are ideal ways to do it? All that right after this.

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Thom Hartmann: Okay I have so many questions about this, this is crazy. We are talking with Professor Steve Keen., I'm sorry I demoted you to associate professor, professor Keen. Full professor of economics and finance at the University of Western Sydney, the author of the brilliant book, “Debunking Economics." And the website, DebtDeflation.com. Twitter: @ProfSteveKeen. And you're still with us?

Steve Keen: Yes indeed.

Thom Hartmann: Okay great. First of all, you know we broached the topic of a jubilee. And I want to get back to that in just a minute. And how that might be done in a way that's politically not just palatable but even conceivable. But first, we began this conversation 30 minutes ago with you pointing out that the ratio of private debt, not government debt, but private debt to GDP had been around 175%, up to 175% that provoked the great depression and then it got deleveraged down to 45%. And then it hit 300% around 2008 and now it's deleveraged down to 250% but it still has a long way to go. All that, and please at any point correct me if I'm mischaracterizing or misremembering anything you said. All of that said, what role does the stuff that in our political dialog here in the United States, everyone is hysterical about, and we're hearing the European Union is all hysterical about, particularly right now with Italy and Spain. What role does government debt play in all of this and what role does the trade deficit, the trade debt play in all of this?

Steve Keen: Okay. The government debt, fundamentally acts as a, should act, and has in some ways in the past acted, in what you might call a homeostatic stabilizer in an air conditioning system. It's like you've got a room that's overheating, which you could regard the private sector you know having a burn, and the government sector effectively chills the room by running a surplus, taking money out of the economy and reducing the temperature. But then when you have the other direction, when you have a slump, by the private sector so the room is freezing, the government goes in the opposite direction and that sort of, that's pretty much what you'll see the energy output of an air conditioner runs in the reverse direction of the energy level in a room and a similar sort of analogy can apply to how the government sector debt generally behaves.

Thom Hartmann: So Keynes and FDR were right in saying the private sector is collapsing so we're going to heat up the public sector. We're going to borrow money and spend it on hiring people to plant trees.

Steve Keen: Yeah. The trouble is that it's hard for people to hear this, because it sounds irresponsible, certainly if you come from a right wing perspective. It sounds, you know, the states spending money and being irresponsible, etc., etc.

Thom Hartmann: Right.

Steve Keen: The way I look at it is to regard the economy as having two fundamental sources of money, for what maintains the economic activity is the turnover of money, but what actually manages to expand is growth in the actual stock of money. And there are two institutions which can generate more money. One is the private sector, by lending money to businesses and individuals, the other is the government by running a deficit and what you have had in this, what's caused this enormous bubble we were in prior to the crash beginning was the private sector lending enormous amounts of money and funding the private sector, so private banks lending to the private sector funding gambling on asset prices, particularly houses, of course, in America.

So that gave you a false boom, but of course to fill that false boom you're also buying large numbers of goods from China to fill those very large empty, you know huge empty American houses you're building. So you get a trade deficit as well at the same time. Now those three factors that affect the amount of money in circulation. Because the loans you were taking out in America were being converted into Renminbi to buy goods from China. So you had a double leakage going on there. So, but I prefer it if we'd regard, look at the entire globe as one system and drill down international currency makes it much more complicated and maybe even my head starts to spin when I start trying to do that on a telephone conversation. But the basic mechanism is to look at the relationship between what the private sector did and public sector did. The growth in both of them changes the amount of money in circulation. Now if you have a private sector massively deleveraged as we're doing now, that is actually taking money out of circulation. So the amount of money turning over and maintaining economic activity is falling. If the government sector attempts to run a surplus they would be doing the same thing.

Thom Hartmann: But now, you say, when the government sector attempts to run a surplus, another way of saying that would be if the government sector tries to practice austerity or if it tries to cut back on its spending, because, you know, we're so far in debt there's no way we're going to run a surplus, but if we have less debt, if we cut back our debt, if we do what the Republican party is suggesting, that is going to be contractive as well as the deleveraging in the private sector is contractive, you add those two things together and you've got a horrible great depression. Am I, am I saying in plain English what you're saying as an economist?

Steve Keen: Yes, you are. I need a bit of translation occasionally. Yes you're right, exactly. And people have a hard time getting their heads around this because they tend to think in a very across time, what's called, what I call static reasoning. They don't look through time and think in a dynamic sense because they see this crisis and they also think about it in a household type analogy when you've got the much more complicated entity that an economy is. And they think well if I'm running a deficit I've got to cut back on my spending and therefore, there's one way to right my own system, it's to spend less and therefore that applies at the national level as well. But what is actually causing the crisis is the level of debt you've got into. Now think about it even as a household, there's two ways you can handle that. One is you can spend less, the other is you can work a lot harder.

Thom Hartmann: Right.

Steve Keen: Now if you actually, if I want to appeal to the American sense of enterprise, the best way to get out of trouble is to work harder rather than just simply to spend less.

Thom Hartmann: Right. And the analogy here for work harder is…

Steve Keen: Is to have more economic activity, not less.

Thom Hartmann: Is to have more government spending even though it's done with debt.

Steve Keen: Yeah. Well because if you, if the private sector is cutting the level of spending then you've got a huge debt burden. And if you actually tell people to save more money what that really translates as is slow down the rate of circulation of money and slow down the amount of economic activity it supports. While trying to reduce the debt level. Well of course what happens is the ratio, if you do that, your economy slows down, your debt level remains the same, your debt burden actually gets worse.

Thom Hartmann: And, is this why the UK right now is sliding into a recession because…

Steve Keen: Yeah, yeah. And it's why Europe, Europe actually signed its own suicide note when it signed the Maastricht Treaty which set this entire thing up in many ways. But of course, England not being part of that, it shows that austerity, even without something as stupid as the Maastricht Treaty, austerity actually pushes you backwards. And each time you attempt to do it you end up with a bigger debt problem than you had beforehand.

Thom Hartmann: Why would these people buy into this notion that you can somehow cut yourself to prosperity?

Steve Keen: I know. It's because unfortunately a totally insane theory of economics which is superficially plausible but fundamentally insane, has taken over the economics profession. Dominated, really since the 1970s.

Thom Hartmann: Are you talking about Milton Friedman?

Steve Keen: And that belief system has become part of how we all think, including politicians, about this problem. And it actually obscures the complexity of a complex capitalist market system and leads us to make insane decisions. Again, if I would use an analogy people might be aware of. As you know, as a driver, and you're going around a corner, most of us if we go too quickly we'll fly it off the edge of the road, because our natural reflex is to turn into the turn we're doing if we start to slide. A professional driver knows you turn the wheel in the opposite direction. Now that is part of what we're talking about here, because it sounds simple to say if you're running a deficit, you're increasing the debt level you should reduce your spending and pay your debt off. But that's a bit like turning your wheel towards the turn as the car is getting out of control. You've actually got to turn it in the opposite direction to regain control.

Thom Hartmann: Right. And then eventually, now the Untied States came out of World War II with a public debt that was 127% of GDP if my recollection is correct.

Steve Keen: That's pretty much accurate, yep.

Thom Hartmann: And we paid that down to within 10 or 15% of GDP within a decade without any austerity whatsoever, in fact we did the exact opposite. Truman and Eisenhower were spending like drunken sailors building a national highway system, hospitals, schools, bridges, roads, communications infrastructure, on and on and on. And it grew the economy so much that tax revenues increased and we paid down our debt.

Steve Keen: Exactly.

Thom Hartmann: Now why can't politicians, whether it's David Cameron in the UK or Paul Ryan and John Boehner here in the United States, or for that matter, Barack Obama, look at that period of time and say, gee that worked pretty well, why don't we try that?

Steve Keen: Yeah. Well partly, one of the reasons it wouldn't be as easy to do now as it was then is that back then of course, private debt which had ballooned out of control in the 1920s exploded with the deflation of the 1930s and then fallen back down with the government stimulus packages of the late 1930s and the impact of the 2nd world war, fallen back to 45% of GDP. That was low and not causing any particular problems and it was also rising at the same time which is, rising debt is not a bad thing. With that rising debt fundamentally finances investment, the incredible, industrial growth of the American economy and the post war period as well. So you had a debt not encumbering the system, rising debt playing a legitimate role to some extent in boosting investment, and then a government sector boosting spending and, for the infrastructure which gave you a more productive private sector to begin with.

This time around you're counteracting the biggest level of deleveraging in human history. And that deleveraging, even thought he government is throwing large amounts of money in, this money being sucked out by the private sector, deleveraging, more than counteracts it. So again if you look at the current level of debt, the government debt has risen about 30, 35% of GDP since the crisis began. The fall in private debt's been about closer to 45, 50%. So even with the government stimulus topping up the system by you know 35% of GDP, the private sector has dipped into it by 45%, we're net negative.

Thom Hartmann: Amazing. And you just said the fastest, the worst deleveraging in human history. I want to get back to that, and back to the jubilee. We're going to take a short break, we'll be right back. It's 45 minutes past the hour.

We're talking with Doctor Steve Keen, professor of economics and finance at the University of Western Sydney, the author of “Debunking Economics," his website, DebtDeflation.com.

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Thom Hartmann: Welcome back, we're talking with Professor Steve Keen. He's the professor of economics and finance at the University of Western Sydney, the author of “Debunking Economics," a brilliant book. His website, DebtDeflation.com, check it out. Professor Keen, in the six minutes we have left here, more or less. Let me just throw two things out and let you go at 'em. You made the comment before the last break that we're seeing the most, the largest or the most rapid, I forget your phrase, you can correct me on this, deleveraging in the history of human kind. That sent chills down my back. It's like okay does that mean this is going to be the worst depression in the history of humankind? Is it going to go international? Is it going to be the kind of thing that's going to like lead to World War II like we saw last time? And secondly we had been talking about jubilee. I would love to hear your thoughts on how some form of debt forgiveness could be done here in the United States or internationally, that is politically viable. So…

Steve Keen: Okay we'll go very quickly through the first bit. The reason deleveraging hits the economy is that total demand in a credit based economy is not just your income it's income plus change in debt. And that change in debt can be spent on two things. Investment or speculation. Unfortunately the vast majority in the last few decades has been on speculation. Therefore when, because debt can go from rising to falling, it can have a dramatic turn around in demand and to take the situation of the American economy in 2008 roughly, your GDP was about 14 trillion, the increase in debt that year was about 4 trillion dollars. So total spending in the economy on both goods and services and flip that house buying of assets was about 18 trillion dollars. Fast forward to 2010 GDP was still roughly 14 trillion dollars, which is the source of incomes. The change in debt was minus two trillion. So you went from being an 18 trillion dollar economy to a 12 trillion dollar economy in about two years. That's why it's so severe.

Thom Hartmann: Wow.

Steve Keen: Therefore that's, so long as that continues happening you're going to have a reduction occurring over time in demand and you're going to grow more slowly than your population grows in rising unemployment and so on. So you have to look at should the debt ever have been extended. And the answer is no. It's not, it wasn't so much irresponsibly borrowed, it was irresponsibly lent. You've got to really say that if you look at where the real responsibility lies it was the banking sector creating debt because it makes money out of itself, for itself out of creating debt, and tossing us into that through rising asset prices which the debt itself caused.

Now the trouble is they then onsold that debt, by securitization, throughout the population. So if you reduce the debt, you'd also reduce the income of anybody in a pension scheme. You're really canceling incomes and so on. So it'd be monumentally damaging to go for an old fashioned jubilee. What I've called a modern jubilee would involve effectively quantitative easing for the public rather than the banks. You know, an enormous amount of money has been given to the banks, to the dimensions of up to eight trillion dollars now being spoken about.

Thom Hartmann: Yes.

Steve Keen: Eight trillion. Give that money instead to the public through their bank accounts in such a way that if the particular individual has debt then the money has to be used to reduce their own debt. But if the individual doesn't have debt, it be either a company or a person, that person gets the remainder as cash in their accounts. That would then mean that people who are in debt have their debt level reduced so the deleveraging happens very rapidly, instantly virtually. But simultaneously, people who don't have debt have cash they can spend out of, which compensates them for the fact that the debt they owned no longer has the same income stream coming in through it. It would still be disruptive and you would still have lots of banks that would be effected by it because bank cash flows would also fall dramatically. So it's not easy, it isn't painless. There is no such thing as a painless way out of this crisis but something like that may ultimately be palatable.

Thom Hartmann: In something like that only the banksters get screwed basically.

Steve Keen: Yeah, yeah. But [cross talk] focus the attention on the banks alone.

Thom Hartmann: But I've raised this before with conservative economists who have said that that 7 trillion dollars that was given to the banks wasn't a gift, it was a loan. And they've paid it back. And what you're talking about here is debt forgiveness, that's a forever.

Steve Keen: Yes. We need a discontinuity. This is what's very hard for people to get their heads around. This problem has been a slow gradual continuous increase in the level of debt, lending money that didn't do anything productive whatsoever. It just let us gamble on house prices. Then we've got the stage where that level that is so great, that as Michael Hudson puts it, debts that can't be repaid, won't be repaid. We've got to work out how not to repay them. What in fact is happening is people are trying to find a way to continue honoring those debts. They want to maintain this continuous process. We need a discontinuity. And the banks, giving money to the banks won't do it.

Thom Hartmann: And this, and continuing the debt is what's going on right now, is it not, where the announcement today that five different central banks are going to help bail out the European community?

Steve Keen: Yeah. They give it to the banks themselves. Again it's just going to continue the same process. They've got to do it in such a way that it reduces private debt. But ironically the economists in charge of those central banks don't believe private debt is even an issue in the economy, still, even after the empirical evidence of the last two or three years. So they would be giving it to the banks or providing it as loans to governments they expect for the loans, the governments to repay. All of it is trying to maintain a continuous process when a discontinuity is needed.

Thom Hartmann: So the economists in Europe, in the European community, are as crazy as the Republican economists here in the United States.

Steve Keen: Yeah, they're all, they all got taught by Paul Samuelson, Milton Friedman, Hal Varian, and also a guy called Mas-Colell. And if you, you have to read the stuff in these text books to believe that anybody can be so nutty as to take this stuff seriously. And again, "Debunking Economics" too goes through that in great detail. But because they all drank from the same Kool-Aid effectively, they're all preaching the same Jamestown religion. So only when we break the grip of those people on economic theory are we likely to get anything even vaguely sensible being suggested to politicians.

Thom Hartmann: Yeah. And Jim Jones is alive and well all over the world.

Steve Keen: Indeed.

Thom Hartmann: It seems. We're just about out of time, I think we have, yeah, just a couple of seconds. So I want to thank you, Professor Keen, so much for being with us today. It's really an honor to speak with you.

Steve Keen: Thank you very much Thom, I'm delighted, and I'm going to send a copy of the second edition of the book your way as well.

Thom Hartmann: I look forward to it. And in fact I'll pay for it and we can do that whole central bank thing.

Steve Keen: Oh we'll do it, the publishers will pay this one, mate.

Thom Hartmann: Okay. DebtDeflation.com is Professor Keen's website. D-E-B-T-D-E-F-L-A-T-I-O-N.com, just like it sounds. Be sure to check it out. His book, “Debunking Economics," it's well worth the read. And thanks so much for being with us. Don't forget, democracy begins with you. Show up, participate. Tag, you're it! Occupy something. See you tomorrow.

Transcribed by Suzanne Roberts, Portland Psychology Clinic.